Report kicks up debate on how high oil will go

Published 9:30 pm, Monday, September 3, 2012

Traffic in Changping, on the outskirts of Beijing, creates opportunities for entrepreneurs. China's oil use figures heavily in energy forecasting.

Traffic in Changping, on the outskirts of Beijing, creates opportunities for entrepreneurs. China's oil use figures heavily in energy forecasting.

Photo: Andy Wong

Report kicks up debate on how high oil will go

1 / 1

Back to Gallery

A prediction that the price of oil could rise 50 percent this decade as global demand exceeds supply left no shortage of opinions from people with professional interest in the matter.

A Barclays research report issued last week asserted that oil produced from shale and other formations won't be sufficient to meet growing global demand as production from older fields declines.

Barclays forecast that the shortfall could push prices for Brent crude, the global benchmark, to $125 a barrel sometime next year and possibly to $180 by 2020.

Brent rose $1.23 to $115.80 a barrel in Monday trading on the London-based ICE Futures Europe exchange. U.S. benchmark crude finished at $96.47 in Friday trading. U.S. markets were closed Monday for Labor Day.

Challenging the notion that "sluggish economic performance plus shale oil must equal a rapidly loosening market," Barclays argued that "while oil output is strong in the U.S., it has slumped elsewhere."

While some analysts concur with Barclays assessment that supply will decline, others say its projections underestimate the effects of shale technology that has made once-inaccessible oil and gas economic to produce.

She also cited fuel efficiency and possibly slower growth in China as factors that could reduce oil demand.

"How China's going to move forward is looking a lot less certain than it was two years ago, and the possibility of breakthroughs in car technology is looking good," Jaffe said.

Others questioned the report's assessment of the potential of new fields and of the industry's ability to integrate them into the supply chain.

"That report totally ignores all the new crude oil being found in the U.S., Brazil and in places like Africa," said Ben Brockwell, director of data pricing for the Oil Price Information Service. "It also ignores the incredible ability of the oil industry to adapt its infrastructure to demand. They are changing real fast and it is going to change the global market."

More Information

No guesswork

Experts disagree about the future prices of oil and gas, but these aren't in doubt:

International benchmark Brent crude (Monday): $115.80 a barrel

U.S. benchmark West Texas Intermediate crude (Friday): $96.47 a barrel

U.S. natural gas (Friday): $2.80 per million British thermal units

Barclays said production is declining each year by close to 4 million barrels per day, while annual global daily demand is rising by more than 1 million barrels, even in the weak economic environment. It added that political tensions in the Middle East could disrupt supplies further, worsening the shortfall in the coming years.

Art Berman, a Sugar Land geologist and energy consultant who has long voiced skepticism about the long-term prospects for the much-touted shale boom, shares Barclays' view on global demand.

"Many of the countries that have historically supplied exported oil have become net importing countries," Berman said, mentioning the United Kingdom and Indonesia as examples. "Meanwhile, countries like China and India have not only a tremendously growing appetite for oil, but they have the cash to pay for it."

Ed Hirs, an energy economics professor at the University of Houston, also concurs with Barclays' assessment about the growing imbalance between production and demand, which Barclays says will start pushing prices aggressively higher in the third quarter of this year.

"One percent decrease in supply of oil could lead to a 10 percent increase in price," Hirs said. "Any inelasticity of demand makes this extremely important."

Berman and Hirs said Barclays' projections may be about right; Jaffe and Brockwell said long-term projections are unreliable because of unforeseeable effects on prices.

Barclays is less bullish on natural gas than on oil, citing discoveries of additional potential shale production fields around the world.

"Other global energy markets do not have the declining production constraints of oil, and prices are less robust," Barclays wrote.

On that point, Berman disagreed, noting that the frequently cited estimate of a 100-year supply of natural gas hasn't been substantiated by detailed resource estimates.

"There is a lot of uncertainty as to how large the U.S. supply is," Berman said. "I agree that it is large, but I don't think it is as large as many people believe."